Tax Audit Frequency and Objectives
In Japan, tax audits are a routine part of the self-assessment system for both corporate tax and consumption tax. Approximately 100,000 corporate tax audits are conducted each year. Typically, profitable companies can expect an audit about once every five years. The primary purpose of these audits is to strengthen the self-assessment process and ensure fair taxation. The National Tax Agency (NTA) is responsible for reviewing tax returns, comparing them with the taxpayer’s financial records, and correcting any discrepancies.
Audit Process
The NTA focuses on auditing companies suspected of tax evasion, dedicating significant time to thorough investigations. The audit process generally follows these steps:
- Advance Notice of Tax Audit:
In most cases, taxpayers are notified of an upcoming audit via phone, allowing them time to prepare. However, if the NTA needs to verify certain business activities directly, advance notice may not be given. - Conducting the Audit:
Upon arrival at the taxpayer’s office or residence, tax auditors will present official identification. A successful audit relies on the taxpayer’s full cooperation, including providing transaction records and answering inquiries. While audits are typically conducted in the taxpayer’s presence, a Certified Public Tax Accountant (CPTA) can represent them if preferred. - Post-Audit Actions:
If discrepancies are found, the Tax Office will explain the errors and outline the additional tax liabilities, recommending that the taxpayer files an amended return. Failure to comply may result in the District Director issuing mandatory corrections. If no issues are identified, the Tax Office will confirm the accuracy of the return or provide advice for future submissions and record-keeping.
Statute of Limitations
The statute of limitations for corporate and consumption taxes in Japan is generally five years from the filing due date of the original return. For loss-making years, the period extends up to nine years for fiscal years ending on or before March 31, 2018, and ten years for those starting on or after April 1, 2018.